The cruise industry’s rough sail

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The cruise industry demonstrates much of what works well in the industrial economy. The debacle of the Costa Concordia – 11 people confirmed dead and at least 23 missing, and a financial loss of as much as $1 billion – shows some of the ways that the economy can malfunction.

The loss of life from the accident off the Italian coast is tragic, and the loss of money is remarkably large for a business that has global annual revenues of around $34 billion, according to Cruise Market Watch. That is not a big business by global standards; airline revenues, as calculated by the International Air Transport Association, are 17 times larger.

Still, the cruise trade is large and familiar enough to provide an illuminating microcosm of the modern economy at work.

The industry started with a little entrepreneurial imagination – Ted Arison, who founded Concordia’s owner, Carnival Corporation, in 1972, believed that there was a mass market for cruises. He was right about this little corner of the consumer culture – cruises are now a popular luxury. Affluence is what now animates the industry – cruise customers must have ample amounts of both money and leisure time.

But the idea would not have borne fruit without technological ingenuity – ever larger ships with ever more luxurious features for customers. Investors willing to take risks were also necessary: Carnival and its rivals had to raise money to build ships that did not have a guaranteed market.

Finally, although it rings hollow right now, strong regulation has helped keep the list of cruising accidents short, with almost no deaths. Even taking the Concordia into account, this sort of sailing is much safer than flying. Put it all together, and you get an industry that has increased its passenger count at a fairly steady 8 percent annual rate for two decades.

That sounds good, but something went badly wrong with the Costa Concordia. On the surface, the problem was nothing more than human error. The captain seems to have sailed too close to land, breaking the rules and overruling the technology.

But basic rules are almost never broken in a well-designed industrial process, and when accidents do happen, there should be recovery systems to minimize the damage.

So look further. Engineers may eventually decide that giant cruise ships need more safety features or even that the whole design is faulty. If that’s the final judgement, it will be hard not to think that entrepreneurial enthusiasm got out of hand. Imagination and innovation are crucial ingredients of modern prosperity, but heedless expansion and experimentation are not.

The cruise industry may be right that its technological model is up to snuff. The failures in the human system are harder to deny. True, it’s too early to say the captain was definitely at fault, and if he was, to decide whether his flouting of the rules was typical or tolerated. But it is clear that the evacuation of the Concordia was poorly managed. Panic could have been avoided if the large crew – one crew member for every three passengers – had been calm and well-trained. A safety drill for passengers, which was supposedly mandatory but apparently skipped, would also have helped.

Look still further. The carelessness on one ship can be traced to the pressures on the whole of Carnival to perform. No, top management didn’t simply sacrifice safety for the sake of profits. Micky Arison, Ted’s son and Carnival’s current chief executive, knew perfectly well that a serious accident would cost much more than any penny-pinching on safety could gain.

The pressure is more subtle. It is built into the economic logic of this fast-growing and competitive industry. Any company that doesn’t build enough ships will soon have an old fleet and can quickly become an also-ran. Carnival, which has a market share of close to 50 percent, is particularly eager to stay on top. But it is easier and faster to build new ships, even ones that cost hundreds of millions of dollars, than to create the sort of instinctive reflexes in the personnel that can prevent stupid accidents and ensure intelligent responses in a crisis.

Once the expensive ships are built, it is punitively expensive not to put them out to sea filled with paying passengers, even if the quality of the staff leaves something to be desired. So unless something is done to alleviate the competitive pressure to run full speed ahead, the people will almost inevitably be the weakest link in the enterprise.

One remedy is for regulators to require more rigorous training. But it would be better if the companies themselves took on the moral responsibility. They could agree to slow expansion until the human capital can catch up with the physical. If bad publicity from the Concordia disaster sparks such a commitment to the common good, then the deaths and damage will not have been completely in vain.

PHOTO: A view of the Costa Concordia cruise ship that ran aground off the west coast of Italy, January 18, 2012. Italian divers suspended their search of the capsized cruise liner after the vessel shifted slightly on its resting place near the Tuscan island of Giglio, officials said on Wednesday. REUTERS/ Max Rossi

One of the most interesting questions raised by this disaster, from my perspective, is the resolution of the navigation charts being used by Captain Schettino. Schettino alleges that the rock his ship struck was not marked on his navigation charts. A BBC article mentioned that certain popular navigation charts are of insufficient spatial resolution to include details like that rocky outcrop, and that they are therefore not recommended for purposes of in-shore navigation: the maps are wholly unsuitable for use in shallow depths, where the margins of error are small, or in volcanic terrain, where there can be sudden changes in depth over a very small lateral distance. If the allegation is true, this of course begs the question… How is it that Schettino was not aware of this limitation in his navigation charts? How is it that he came to trust the charts so much that he was willing to take risks that were not warranted, based on the information he had?

In the modern world, and in the modern economy in general; we are increasingly coming to rely upon computerised machinery (including in this definition, software). Few people really understand how that machinery works, or take the time to acquaint themselves with its limitations; which are typically less obvious than they would be in the case of a physical printed map that does not automatically zoom in-and-out. We are being insulated within a bubble of beautiful user-interfaces that lull us into a false sense of security.

Industries like air travel, large shipping and the military serve to highlight the dangers of over-reliance on fallible technology, as their periodic brushes with large-scale life-and-death situations are hard to ignore or conceal. Other industries such as banking are equally flawed, yet they have not received the same rigorous treatment.

Any business that wants to succeed should take a good look at this subject!

* Is the computer software really fit-for-purpose?
* What are its limitations?
* How well are staff acquainted with the fundamental strengths, limitations and competitive advantages of their tools?

The Cruise Industry is the result of Royal Caribbean’s Edwin Stephan who started the line in 1969 with three warm weather cruising ships – and unlike Arison, grounded none of them on their inaugural sailing from the Port of Miami. There are huge differences in how one company will be run versus another, and Carnival seems always to be on the cheap. Do you really think K-Mart and Nordstrom’s carry the same goods just because they are both retail outlets? In this case, it is obvious that the intent to sail where they were was intentional – GPS can now be used to dock ships and hold them in place. You don’t drift hundreds of feet “by accident” in today’s world.

They could have used double hull construction but that doesn’t seem to be the case with the Costa Concordia. I understand that oil tankers use double hulls but there is a cost in terms of lost interior usable volume.

What still amazes me is – imagine trying to tip a 15-story building over and have it stand on one edge for as long as this ship has been in that semi-buoyant position. It is a very strong building with a watertight bottom and sides. Even the windows – which are under some increased pressure from trapped air, are able to withstand the pressure of the weight of the ship that is still not fully resting on the bottom – according to a diagram I saw in the BBC site. Apparently it is still vulnerable to wind and waves that could cause it to move further out and sink deeper.

But bigger is better and safer on the open seas. I don’t think any naval architects would argue with that?

I imagine the number of little boats and smaller craft that go down is too long to try to list. There seems to be at least one or two a year with enormous loss of life. It seems to happen often in the Far East and S.E. Asia.

BTW – No one seems to have asked the captain what he was doing on shore and if he may have been trying to coordinate rescue operations from there?

In forty feet of water the ship could have sunk to the bottom and sat flat on it bottom and still had about ten stories above water. Unfortunately the rock that it scraped and can be seen in some photos still embedded in the hull, caused the ship to tip away from the rip and that seems to have caused it to flood first on the side opposite the gash.

“On the surface, the problem was nothing more than human error. The captain seems to have sailed too close to land, breaking the rules and overruling the technology.”

But no, we can’t leave it at that. Nope. Need more regulations. Need more government interference. Those damn greedy cruise lines. We need to fill our print space with reasons the cruise industry should be turned inside out.

This all happened because of greedy businesses wanting to make more money. What a crock.

Put in one regulation: to over ride the computer’s navigation system, there needs to be a littany of steps so stringent, no one would dare do it. Period.

Author Profile

Edward Hadas writes about macroeconomics, markets and metals for Reuters Breakingviews. Before becoming a journalist, he worked for 20 years as an equity analyst in Europe and the US. His book, "Human Good, Economic Evils: A Moral Approach to the Dismal Science" is published by ISI Books in Wilmington, Delaware. He has also written a course-book about political philosophy for the Maryvale Institute in Birmingham. Edward has degrees from Columbia University, Wadham College, Oxford and the State University of New York at Binghamton. He has a website, edwardhadas.com.